Random Friday Fun Facts: The South Sea Bubble

Fair warning – I am sitting in an airport in Berlin as I write this. It’s 9am local time and I’ve been here for almost two hours on a layover waiting to go back to Spain after an overnight flight during which time I didn’t sleep, but I did watch Tammy with Melissa McCarthy, which IMDB only rated 4.8 out of 10 stars, but which I thought was freaking hilarious, to the point that I literally snorted out loud several times.  Perhaps it was just that I was really tired.  I’ll have to watch it again sometime after I’m rested and see if I think it reaches the same level of hilarity.  And here’s a random nugget of information: in the section of the airport where I’m waiting, there isn’t a coffee shop that I can find.  There is, however, a bar serving beer and pretzels.  I obviously have very different priorities at 9am after an 8 hour overnight flight than the Germans here.  So in an effort to keep myself awake and alert, I am listening to a Eurovision playlist on Spotify and dancing in my chair.

220px-South-sea-bubble-chartSo I’m still immersed in London, the Novel.  At some point in my life I’ll finish it.  I’m at 75% now.  It’s only taken me just about a month to get there.  I guess I have about a week left.  Anyway, I’m at a point where the modern banking system is being created, and there’s a mention about the South Sea Company, which was one of the first economic booms and busts in modern times.

The South Sea Company (officially The Governor and Company of the merchants of Great Britain, trading to the South Seas and other parts of America, and for the encouragement of fishing) was a British company in the early 18th century that was granted the exclusive rights to trade with Spanish colonies in South America in return for taking on the Government’s debt from the War of Spanish Succession.  Investors thought that there would be huge profits available from the gold and silver mines in South America, and caused the share price to skyrocket.  One of the things that was unique about it was how it involved people from every class.  Similar to the dotcom bubble when people who had never invested before suddenly quit their jobs to become day traders, people from every class were represented in the trading of the South Sea Company.

At the time, the term “South Seas” was used to refer to South America, and any of the lands nearby.  The Lord Treasurer Robert Harley started the company with John Blunt, the former director of the Sword Blade Company.  Robert Harley, as Lord Treasurer, wanted to figure out a way to fund the government debt that from the War of Spanish Succession (1701-1713).  The Bank of England had been established as the only joint stock bank, and so he was unable to start a bank.  Instead, he started a trading company, though the company’s business was funding the government debt, through offering the exclusive trading rights with the colonies.  They managed to raise £10 in short term debt in exchange for shares of the Company, and in return also gave an annuity, paying about 6%.  The shareholders gained a steady stream of earnings, and the government wanted to fund the interest payments by placing taxes on goods imported from South America.

The war ended in 1713, and the Treaty of Utrecht spelled out the South Sea Company’s trading rights into writing: the right to supply the Spanish colonies with slaves and to send one trading ship per year. These formalized trading rights were a disappointment to Robert Harley as they were nowhere near as extensive as he had originally expected when he founded the company in 1711.  As of 1719, the government was in debt by £50 million, £18.3 million of which was held by three of England’s largest corporations. The Bank of England was one of the three corporations and owned £3.4 million of that total debt, while the British East India Company owned £3.2 million and the South Sea Company owned £11.7 million.

Despite the trading rights being lower than originally planned, the executives spread rumors of all of the gold and silver in Sough America waiting to come back to England.   There was a speculative craze for shares in 1720.  High ranking employees and even the King’s mistress bought shares.  The politicians also bought in an unconventional manner – they had an option to sell back later, allowing them to keep all the profits.  They helped to improve the value of the shares, and also made the whole thing seem much more legitimate.

At the same time, several other joint-stock companies formed to take advantage of the demand for investments like this.  Including businesses formed:

  • For supplying the town of Deal with fresh water.
  • For trading in hair.
  • For assuring of seamen’s wages.
  • For importing pitch and tar, and other naval stores, from North Britain and America.
  • For insuring of horses.
  • For improving the art of making soap.
  • For improving of gardens.
  • For a wheel for perpetual motion.
  • For importing walnut-trees from Virginia.
  • For paying pensions to widows and others, at a small discount.
  • For making iron with pit coal.
  • For the transmutation of quicksilver into a malleable fine metal.

And:

  • For carrying on an undertaking of great advantage; but nobody to know what it is.

These highly speculative companies were nicknamed “bubbles” and, in an attempt to control them, Parliament passed the “Bubble Act” in 1720 that required new joint-stock companies to be incorporated.  Though by this time there was a huge demand and people from every class took part.  The company never showed much of a profit, despite promises of future growth.  The shares reached a peak of around £1000 per share by August 1720 and then quickly fell, thanks in part to a plan that John Blunt had started earlier in the year that allowed for the company to lend investors money to buy shares, which forced many shareholders to sell shares to cover the first installment of payments due in August.

The speculators who had purchased on credit went bankrupt quickly, and were suddenly down to £150 per share in September 1720, just a month or so after the high.  Even Sir Isaac Newton lost a £20,000 (equivalent to about £268 million in present day value) fortune in South Sea Company shares, causing him to remark, “I can calculate the movement of the stars, but not the madness of men”.

Parliament opened in investigation into the bubble in December 1720 and many leading cabinet members and high profile politicians wound up being impeached, and Parliament passed a series of new measures to restore confidence.   A proposal was even made in Parliament to place bankers in sacks filled with snakes and thrown into the Thames River, going farther than even the #Occupy movement.

Comments

comments

Comments are closed